Licence grant wording: take care over the details

Ken demonstrates the ancient art of cat’s cradle, conceptually, and without the wool

IP Draughts’ favourite commentator on contract drafting issues, Ken Adams, has written an article, Granting Language in Patent License Agreements: An Analysis of Usages. The article has recently been published by Landslide, the magazine of the American Bar Association’s Section of Intellectual Property Law.

It is always interesting to read Ken’s views, particularly when his accompanying blog article issues a challenge to IP lawyers, expressed in Donnesque terms:

IP guys, you are not an island: it’s best to base your contract usages on general guidelines for clear and modern contract prose.

IP Draughts agrees with the sentiment, and with much of what Ken says in the article. That is not entirely surprising: he saw a draft of the article and commented on it. There are, though, a few more IP factors to take into account before reaching any conclusions on the drafting points that Ken identifies – factors that might only be known by an IP specialist.

Cutting to the chase, the article provides “before and after” versions of a typical licence grant clause, the latter being Ken’s approved version. Here is the “before” version:

Subject to the terms and conditions of this agreement, Acme hereby grants to the Licensee, and the Licensee hereby accepts, an exclusive royalty-bearing license under the Patent Rights, with the right to grant sublicenses, in the Field of Use, in the Territory, to make, have made, import, use, have used, offer for sale, sell, and have sold Licensed Products.

And here is the “after” version:

Acme hereby grants the Licensee an exclusive, royalty-bearing (in accordance with section 4.5) license (with the right to sublicense) under the Patent Rights in the Field of Use to make, have made, use, offer for sale, sell, and import Licensed Products in the Territory.

As John Donne nearly said: Every IP lawyer is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.

IP Draughts mostly agrees with the latter version, though he would probably make any right to sublicense subject to conditions, which would be set out in a separate clause or section. A cross-reference to that other clause would be appropriate. He would probably not bother to state here that the licence is royalty-bearing, as this means no more than that a contractual payment is due, which can be set out in a separate clause without a cross-reference in the grant clause.

Ken identifies a number of usages in conventional licence grant clauses that are either redundant or sub-optimal. IP Draughts’ brief summary of Ken’s comments, and his response to those comments, follow:

1. Use the verb grants not licenses. Agreed.
2. Refer to a licence not a right. Agreed.
3. Use the expression hereby grants. Agreed.
4. Don’t say ‘grants and agrees to grant’; the latter is redundant even in the case of future IP. Agreed in the case of licences. There may be some value in the case of assignment, in view of the differing national rules (and different rules for different types of IP within a jurisdiction) on the legal effect of an assignment of future IP. For a discussion of some US issues, see here.
5. No need to ‘accept’ the licence. Agreed under English law. The advice from the Dutch contributor to our loose-leaf work on biotech transactions was that it was necessary to state that an assignee of IP, or a distributor of products, accepted the IP or appointment, and similar principles are likely to apply to licences. Bearing in mind that many IP licences are international, it may be safer to include some words of acceptance.
6. Grant a licence, not a ‘covenant not to sue’ or an ‘immunity from suit’. Agreed. For a discussion of covenants not to sue and their usage, see here.
7. Explain exclusive, sole, etc. Ken makes some subtle points about US drafting practice (eg phrases such as “exclusive, even as to the licensor”) but in the end, his “after” version simply says “exclusive”. IP Draughts’ view is that sophisticated parties are likely to be clear on the meaning of exclusive, but sole and semi-exclusive should be defined. And that if the EU territory is being divided, it would be prudent to be clear on whether sale outside the territory is permitted, and to ensure that whatever is agreed is aligned with EU competition law.
8. Perpetual, irrevocable. As Ken notes, these terms are not synonyms. A licence could be perpetual, subject to right of early termination. Irrevocable is probably okay as a term in a short licence (if that is what is intended) but ideally the licence would make clear that no form of early termination by the licensor (whether or not properly characterised as revocation) is allowed.
9. Assignable. IP Draughts shares Ken’s reservations about using the word “assignable” or similar in the long list of adjectives that precede the word “licence”. Instead, address this issue more precisely in separate clauses dealing with assignment and (less commonly) change of control. You may also want to address the question of whether the licensor is permitted to assign the IP that is being licensed, and the consequences for the licence of doing so. Typically, the default position under national patent laws is that a licence registered with the patent office is binding on a future owner, but what is less clear is whether the contract under which the licence was originally granted has any continuing effect. These matters should be addressed explicitly in the licence agreement.
10. Sublicensing. IP Draughts agrees that the licence should address whether sublicensing is permitted. This is typically a matter for national patent law and the “default” position (ie if not addressed in the contract) varies between jurisdictions. However, if sublicensing is to be permitted, it is usually subject to conditions, eg as to duration, consistency of terms, etc, and those terms should be stated. IP Draughts’ preference is state these things in a separate clause an omit the word “sublicensable” in the grant clause.
11. Worldwide. IP Draughts understands that, logically, it may be wrong to say a licence is worldwide if the IP is not registered in every country of the world, and of course one should be careful about giving warranties in unpatented territories. Nevertheless, licences are often expressed to be worldwide and usually this will not cause major problems of interpretation.
12. Royalty-bearing or royalty-free; fully paid-up. IP Draughts can see a point in stating that no payments are to be due (if that is the case) and that a phrase such as “fully paid-up and royalty-free”, while rather jargon-ridden, may the simplest legal shorthand to express the point. He can see no point in stating that a licence is royalty-bearing in the long list of adjectives before the word “licence”. Just have a separate clause dealing with royalties.
13. Limited licence. IP Draughts agrees that it is unnecessary to say that a licence is limited. The only concern that he identifies with this simple advice is that, particularly for US parties, the Universal Copyright Convention (to which most countries of the world are not parties, preferring the Berne Convention) has, or used to have, a concept of limited licences, which explains why copyright statements referred to limited licences as well as, or instead of, using the phrase “all rights reserved”. Although he is not a US lawyer, he understands that the provisions of this Convention may have been modified in recent years, making these references redundant. No doubt readers who are US lawyers can enlighten us!
14. Licence to do what? IP Draughts agrees that the licence should state which otherwise-infringing acts the licensee is permitted to do, eg make, use and sell products. He was interested to see Ken’s explanation of why, in light of US law, licence agreements sometimes include a reference to “export”. IP Draughts has found this word problematic in past transactions and usually tries to avoid it.
15. Subject to the terms of this Agreement. IP Draughts agrees that this expression is probably unnecessary in the grant clause, particularly if a separate termination clause makes clear that on any termination of the agreement, the licence automatically terminates. However, some lawyers clearly have a concern that the licence, once granted, may exist independently of the agreement under which it was granted, as a form of property right. For this reason, IP Draughts has tended to include this phrase, though he is now having second thoughts about its usefulness.